Tug of War

361 Capital Market Commentary | February 19, 2019

With the S&P 500 now trading at 16 times its 2019 consensus earnings estimate in a declining earnings environment, it is now time for the fundamental valuation anchor to begin to resist the very strong pull of a technical bounce since Christmas. Either the outlook for earnings is low, or there is no more slack in the stock market’s rope. Most potential future impacts continue to appear to be negatives for the market: global growth slowdown, taxation of buybacks, deteriorating credit environment, war on the wealthy, etc. As far as a market positive, there is still hopes of a trade agreement with China but nothing is signed as of yet. Given that the market moves higher on every mention of the soon-to-happen ‘great’ China trade deal, you have to wonder how much more of a positive market impact there will be left for the official announcement.

The market also remains hinged toward any Fed official comments regarding balance sheet changes. Rate hikes are no longer interesting since they are assumed to be done for this cycle, so the market has shifted to the next best thing to over-analyze. For now, it appears that the consensus is to slow or stop the balance sheet run off. The farther away from QT, the better for this stock market. Who cares about the future? This Fed lives for the present! All I can say is be careful with your risks. I continue to favor Emerging Market exposures (stocks, bonds and forex) to the United States. Gold continues to act well as the Fed gets loose with QT and the U.S. dollar scratches its head. And cash still yields nearly 2.5%.

So many big portfolios de-risked into year end as volatility soared…

But now they are being pulled back into the stock market as volatility falls and returns rise. This is a big reason for this continued climb and could explain future gains. A very difficult time for Risk Parity investors.

The market’s rally has also forced investors to rebuild positions they may have sold off during December’s tumble—and they may not be finished just yet. Hedge funds and risk-controlled portfolios still have little exposure to the market relative to history, noted Marko Kolanovic, global head of quantitative and derivatives strategy at JPMorgan, while retail investors have still not put much money back into the market after the downturn. That suggests the current rally could last until May, he wrote. “If volatility stays contained,” Kolanovic explained, “re-risking should continue.”



Goldman notes that if history repeats itself, we are set up for a pause…

Goldman Sachs is warning that this year’s U.S. stock rally is set to stall after equities rebounded from last year’s drop at the fastest clip in at least seven decades.

The S&P 500 Index’s 17 percent surge from a Christmas Eve low means the pace of gains has surpassed the previous 10 recoveries from declines of about 20 percent since World War II, the firm’s data showed. If history is any guide, the bank warned, the benchmark index is likely to stay flat over the next three to six months.


SP500 historical playbook suggests a more gradual near-term path

On to the economic data: There are still more job openings than the number of Americans who are unemployed…

Job Openings/Unemployment Level

But, small businesses remain hopelessly confused…

@spomboy: NFIB small biz ‘good time to expand’ posts largest 2 month decline on record.

Small Business Good Time to Expand Graph

And despite the early holiday sales data, it was a terrible year end for retailers…

Deutsche Bank Graph

Did Fortnite kill the sporting good retailer?

Retail Sales: Sporting Goods

Redbook sales continue to weaken into 2019…

Redbook Retail Sales Index

And Payless Shoe Source gives up…

Strangled by debt and new rivals, discount shoe chain Payless ShoeSource Inc. is closing its roughly 2,100 U.S. locations in what is likely to be the largest-ever retailer liquidation by number of stores.

The chain is preparing to file for bankruptcy protection, according to people familiar with the matter, less than two years after its previous restructuring, when it shut approximately 500 locations. The retailer, taken private in 2012 in a $2 billion leveraged buyout, has been hit by declining sales.

The company, which employs roughly 18,000 people world-wide, said Friday that it would begin liquidation sales at its U.S. and Puerto Rico stores on Sunday and that it is winding down its e-commerce operations. “We expect all stores to remain open until the end of March, and the majority will remain open until May,” a spokesman said.



The Atlanta Fed is throwing in the towel on the Q4 2018 GDP estimate due to the much weaker Retail Sales and Personal Consumption data…

Evolution of Atlanta Fed GDP Estimate for 2018

If you want a good read of the difficulties in China look no further than its offshore casinos…

@TihoBrkan: Macau casino revenue has stopped growing for the first time since 2016. It’s clear China is in a slowdown, no matter where you look.

Macau gaming revenues

Across the left pond, the industrial data of Europe only gets worse…

@jsblokland: The plunge! Eurozone industrial production confirms ugly picture individual member states already gave. Massive collapse in production in December, down 4.2% YoY, most since the financial crisis.

Eurostat Industrial Production

And for those in Chelsea, your tractor is about to get 10% more expensive…

Porsche’s U.K. unit told customers they might have to pay as much as 10 percent more than expected if the country makes a hard Brexit and their imported car arrives after March 29.
The information is precautionary and will allow customers to plan ahead for if the U.K. leaves the European Union at that date, Porsche said Friday in an emailed statement. Customers who placed deposits on or before Jan. 17 won’t be affected.The warning shot from Volkswagen AG’s most profitable division marks the latest sign that the U.K. failing to reach a divorce deal with the EU could send ripple effects across the industry and affect dealerships, factories and suppliers.(Bloomberg)


Meanwhile, Brexit uncertainty will close a 3,500 job Honda auto plant in Swindon, England…

Honda’s operations in Britain are highly dependent on being connected to the European Union; the company had already said it would close its factory temporarily in case no-deal Brexit triggered chaos.

About 40 percent of the components that Honda uses at the Swindon factory come from the European Union, while 35 percent of its exports are sent to the region, according to Patrick Keating, the government affairs manager at Honda Motor Europe.

Mr. Keating told a parliamentary committee in 2017 that Honda had “about 2 million components a day coming in on 350 trucks” from Europe.



Whoever built this Brexit Leave ad should be ashamed…

@FenCoul: Not aging so well…

Leave EU advertisement

‘Brexit’ on HBO is a must watch…

The result of the Brexit referendum in summer 2016 caused a political earthquake that laid waste to the normally stable British establishment and sent political tremors around the world. This provocative feature-length drama goes behind the scenes, revealing the personalities, strategies and feuds of the Leave and Remain campaigns. The tactics employed by Vote Leave during the data-driven campaign swayed a historically silent voting bloc that would ultimately decide the outcome of the referendum, as well as affecting future elections around the world.

Benedict Cumberbatch portrays Dominic Cummings, who spearheaded the Vote Leave campaign. Rory Kinnear plays Craig Oliver, Prime Minister David Cameron’s director of communications and head of the Remain campaign. Brexit is directed by Toby Haynes; written by James Graham; executive producers, James Graham, Juliette Howell, Tessa Ross; produced by Lynn Horsford.


HBO Brexit Movie

Extreme oversold to extreme overbought…


On Dec 24, only 1% of stocks in the S&P 500 closed above their 50-day moving avg, one of the most extreme oversold levels in history.
After an 18% vertical rally over the last 8 weeks, that number now stands at 92%, one of the most extreme overbought levels in history.

Stocks Above 50 day moving avg

The recent market breadth is impressive…

Future tattoo idea: “Don’t Fight the Fed”

NYSE - Advance Decline Isssue

Oil and Small Caps told everything else to step aside last week…

Oil and Small Cap Sector Returns

A very impressive run of outperformance by Small Caps…

Russell 200 Small Cap Index

EM is weaker YTD but many investors would agree with this statement right now…

Emerging Markets Tweet

Among sectors, it was a full cup of green last week…

Ditto for the year to date.

Sector Returns

A different glance at the sectors highlights some weakness still in a few sectors: Energy, Communications, Financials and Materials…

Sectors Highlights

If it feels like a long time since a 5% move in the market, you are correct…

5% move in the market tweet

Semiconductor quote of the week…

“The computing needs of Earth is not certainly being satisfied with what we shipped last quarter.” CEO of NVIDIA commenting on the demand of his semis for AI purposes.



Barry Diller is always a must listen on Media…

“Hollywood is now irrelevant,” Diller said on the latest episode of Recode Decode, hosted by Kara Swisher. “… It was these six movie companies essentially were able to extend their hegemony into everything else. It didn’t matter that they started it. When it got big enough, they got to buy it. For the first time, they ain’t buying anything. Meaning they’re not buying Netflix. They are not buying Amazon.”

“In other words, it used to be if you could get your hands on a movie studio, you were sitting at a table with only five other people,” he added. “And so that table dominated media worldwide. That’s over.”



Hollywood may be irrelevant, but hat’s off to Universal Pictures for lining up the biggest non-superhero movie of the summer…

Yesterday Movie
(Yesterday Movie)

If you have ever driven through Texas, then you know why Buc-ee’s will soon dominate every major intersection of highways in America…

The Bastrop Buc-ee’s opened in 2012, and it has more or less the same relationship to the first Buc-ee’s store that a Boeing 747 has to the biplane the Wright brothers flew at Kitty Hawk. The store occupies 56,000 square feet and has aisles wide enough to drive a golf cart through. It has 71 toilets and urinals and a team of custodians whose entire job is to clean the bathrooms 24 hours a day. It has 96 gas pumps under two canopies selling Buc-ee’s-branded fuel. There are 655 parking spaces that fan out from the store on three sides, and they’re extra roomy, 10 feet by 20 feet instead of the standard 9 by 18, so as to better accommodate Texans’ trucks.

It might all seem “a touch overkill,” Aplin allowed. “But I don’t ever want to be over capacity. We like to make it spacious, give everybody their own space and their own shopping experience. It’s one of the reasons it gets so big, because if you try to enhance the space everywhere, it just grows, and then the next thing you know . . .” He trailed off.

As we walked the floor, it became clear just how many times “the next thing you know” has happened at Buc-ee’s. We stared up at a towering wall of gummy candies, taffies, candy corn, and cherry sours. (“The selection is almost overwhelming, which is good,” Aplin said.) He led me to a corner of the store stocked with cooking gear—Buc-ee’s spatulas, Lodge cast-iron pans, open-fire cookbooks, a $1,000 offset smoker. (“I just think it’s cool. I think it’s Texas. It’s chuck wagon. It’s cooking the cowboy way.”) He wended his way past the shelves of hot sauce and mayhaw jelly, Buc-ee’s barbecue spice rub and Buc-ee’s raw wildflower honey. (“This comes from a young man in Lake Jackson. He’s quite a beekeeper.”) He marveled at the refrigerated deli counter with hunks of jerky (thirteen varieties), dried sausage links, and spicy venison sticks. He stopped in front of an easy-to-miss refrigerator stocked with an assortment of prepared dishes, among them crawfish fettuccine, bacon-wrapped pork tenderloin, and chicken cordon bleu.



When Byron Wien talks about life, you must read it, then forward it, then print it out and tack it up somewhere…

Here are some of the lessons I have learned in my first 80 years. I hope to continue to practice them in the next 80…


Charlie was on fire last week…

@carlquintanilla: Charlie Munger, talking with @BeckyQuick about how certain states “have driven out all the rich people”:

Charlie Munger interview

Can you do 40 push ups?

Active, middle-aged men able to complete more than 40 pushups had a significantly lower risk of cardiovascular disease (CVD) outcomes — including diagnoses of coronary artery disease and major events such as heart failure — during 10 years of follow-up compared with those who were able to do fewer than 10 pushups during the baseline exam.

“Our findings provide evidence that pushup capacity could be an easy, no-cost method to help assess cardiovascular disease risk in almost any setting. Surprisingly, pushup capacity was more strongly associated with cardiovascular disease risk than the results of submaximal treadmill tests,” said first author Justin Yang, occupational medicine resident in the Department of Environmental Health at Harvard T.H. Chan School of Public Health.



Wonder what Opportunity did with the extra 39 minutes each day?

A mission of 90 days became 5,000 days. Great job to all who worked on the Opportunity rover.

Opportunity’s scientific accomplishments were only possible because it had been such an engineering success, said NASA’s acting director of planetary science Lori Glaze. The rover was adaptable, tenacious and diligent, and its drivers never failed to get it to its targets.

“Being able to really roll right up to an outcrop and examine it, to look up close with your hand lens, do the chemistry measurements … it allows you to really feel like you’re there,” she said. “That absolutely changed the way we go about doing planetary exploration.”


Opportunity Rover
(From its perch high on a ridge, Opportunity recorded this image of a Martian dust devil twisting through the valley below. The view looks back at the rover’s tracks leading up the north-facing slope of Knudsen Ridge in Marathon Valley. NASA/JPL-Caltech)

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